David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Tata Global Beverages Limited ( NSE:TATAGLOBAL ) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Tata Global Beverages's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Tata Global Beverages had debt of ₹11.5b, up from ₹10.7b in one year. But on the other hand it also has ₹15.7b in cash, leading to a ₹4.23b net cash position.
A Look At Tata Global Beverages's Liabilities
Zooming in on the latest balance sheet data, we can see that Tata Global Beverages had liabilities of ₹14.7b due within 12 months and liabilities of ₹11.1b due beyond that. Offsetting these obligations, it had cash of ₹15.7b as well as receivables valued at ₹9.85b due within 12 months. So these liquid assets roughly match the total liabilities.
Having regard to Tata Global Beverages's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹163.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Tata Global Beverages also has more cash than debt, so we're pretty confident it can manage its debt safely.
On the other hand, Tata Global Beverages saw its EBIT drop by 5.5% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tata Global Beverages can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts .
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Tata Global Beverages may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Tata Global Beverages reported free cash flow worth 17% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
We could understand if investors are concerned about Tata Global Beverages's liabilities, but we can be reassured by the fact it has has net cash of ₹4.2b. So we are not troubled with Tata Global Beverages's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Tata Global Beverages, you may well want to click here to check an interactive graph of its earnings per share history .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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